Trade agreement dawn enhances US rate cut expectations, dollar falls to four-year low against euro and pound.

On Monday, the US dollar fell to its lowest level against the euro in nearly four years. The market's optimistic expectations for a US trade agreement boosted expectations for an early rate cut by the Federal Reserve. The exchange rate of the US dollar against the British pound also fell to a four-year low, while the exchange rate of the US dollar against the Swiss franc fell to its lowest level in over a decade. However, at the same time, US President Trump suddenly interrupted trade negotiations with Canada, bringing uncertainty to the market's optimistic expectations. Investors believe that Federal Reserve Chairman Powell's testimony to the US Congress last week showed a more moderate attitude. Previously, he stated that if inflation did not rise significantly this summer due to tariff factors, then a rate cut may be possible. According to the Chicago Mercantile Exchange Group's "FedWatch" tool, the probability of at least a 25 basis point rate cut by the Federal Reserve in September has risen to 92.4%, compared to about 70% a week ago. Expectations for a rate cut by the Federal Reserve in July have also increased from zero earlier this month to nearly 20%. The Federal Reserve will not meet in August. Chris Weston, research director at Pepperstone, wrote in a report to clients, "Market pricing indicates that there will definitely be a rate cut in September." Weston stated that the US monthly jobs report is the most important risk event this week. Given that the Fed's reaction mechanism tends to focus on the timing of the next rate cut, the risks faced by the US dollar "seem asymmetric." He pointed out that this means the US dollar is more likely to suffer a sharp decline due to poor data rather than rise due to strong data. The US dollar faces additional pressure from President Trump's continued attacks on Powell. Trump said on Friday that he would be "very happy" if Powell resigns before the end of his term in May. Trump also stated that he wants to cut the benchmark interest rate from its current level to 1%. Furthermore, he emphasized once again his plan to replace Powell with a chairman more inclined to loose policies. Investors are also closely watching the large-scale tax and spending bill proposed by Trump. According to data from the Congressional Budget Office, the bill currently being submitted to the Senate is expected to increase national debt by $3.3 trillion over ten years. The US dollar index (which measures the dollar against six major currencies, including the euro, pound, and franc) rose slightly by 0.01% to 97.276, but remains near the three-year low of 96.933 set late last week. The euro exchange rate fell slightly to $1.1716, slightly below the highest level since September 2021 (reached last Friday at $1.1754). The pound exchange rate remained at $1.3709, almost unchanged from its peak of $1.37701 on Thursday, a level not seen since October 2021. The exchange rate of the US dollar against the Swiss franc stabilized at 0.7988, having briefly fallen to 0.7955 on Friday, the first time since January 2015 when the Swiss National Bank unexpectedly abandoned its currency cap against the euro. The exchange rate of the US dollar against the Japanese yen remained at 144.58. The risk-sensitive Australian dollar rose slightly to $0.6537 and gradually rebounded to its highest level in seven and a half months set on Thursday at $0.6563. US Treasury Secretary Besent said on Friday that various trade agreements between the US and other countries could be signed during the Labor Day holiday on September 1, allowing some flexibility to the deadline set by Trump on July 9 for reaching agreements, otherwise the US will face severe penalties with "equivalent" tariffs. Analysts from the Commonwealth Bank of Australia wrote in their weekly forex strategy report, "In our view, the movement of the US dollar this week will be determined by US trade dynamics. We are skeptical about this because many trade agreements have been reached so quickly. However, news of some trade agreements being reached will support the US dollar against major currencies such as the euro, yen, and pound, and the dollar may depreciate against other currencies such as the Australian dollar."